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ASSET BASED LOANS / ASSET BASED FINANCING
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Read on because this piece explores the often overlooked potential of asset-based funding and business credit lines, essential for Canadian entrepreneurs seeking financial empowerment
Credit Lines and Asset Funding: The Business Lifelines Explained
INTRODUCTION
Business credit lines in Canada. What went wrong? When we talk to Canadian business owners and financial managers it's simply a case of 'not enough', or not at all.
They have challenges obtaining traditional bank financing via cash flow lending for their operating needs. Is there a solution? One solution is asset based funding for credit line needs.
How can businesses strategically leverage their existing assets to unlock new realms of financial potential through asset-based funding and credit lines via the company's cash flow? Let's dig in and examine why!
Business credit lines and asset-based funding are vital financial tools that empower companies to leverage their assets for growth and stability. By utilizing business credit lines, companies gain flexible access to capital based on their creditworthiness, aiding in cash flow management and operational expenses.
Asset-based funding, on the other hand, allows businesses to secure loans using their assets as collateral, offering a tangible way to finance expansion or cover unforeseen costs.
Together, these financing methods provide businesses with crucial liquidity options, tailoring financial solutions to a company's unique needs and asset portfolios.
ASSET-BASED LENDING WORKS FOR ALL COMPANIES AND INDUSTRIES
The good news about asset-based lending is that it's pretty well for everyone - from start-ups to its current usage by some of the largest companies in Canada. No industry can be disqualified by an asset-based lending solution if you have one requirement - sales and strong assets!
Based on the value of inventory financing, fixed assets/ equipment or receivables and sales you've just unlocked significant borrowing power in a secured revolving line via the asset based lender!
IT IS ALL ABOUT POOLING ALL YOUR BUSINESS ASSETS INTO ONE FACILITY
Asset based line of credit funding for credit lines works because it uses somewhat of a... shall we say ' buffet ' approach. By that, we mean that it takes a look at all of your assets and picks and chooses to combine them into one borrowing facility that you draw down on an ongoing basis.
It's that pooling concept that makes ' ABL ' (asset based lending') work. That pool of assets by the way includes receivables, equipment, inventory, and even your real estate if your company owns it. Imagine using a portion of your company's building and premises as part of your day-to-day business line of credit.
That's what ABL is/ does. Accounts receivable inventory management solutions are at the heart of asset based lending. In factoring a borrowing base is established for accounts receivables when they are a part of a true non-bank business line of credit.
' UNLOCKING BORROWING POWER ' VIA ASSET BASED LENDERS
As a business, you have in fact ' unlocked' your borrowing power, and when you combine that with the flexibility of bundling them together into one borrowing facility you have... you guessed it, cash flow power! The ABL lender will perform basic due diligence around your ability to cash flow your sales.
ABL LENDING HAS DIFFERENT SUBSETS - WHICH ONE MIGHT WORK FOR YOUR FIRM?
One aspect of ABL that is sometimes misunderstood, although we have hinted at it already above, is that it has various subsets. So yes, you can just have an ABL A/R facility, in industries where inventory is heavy on the balance sheet - for example, in a retailer, just the inventory becomes the borrowing power. Ditto for physical assets such as equipment and company-owned real estate. Accounts receivable lines of credit are a form of factoring receivables.
Asset-based funding almost always works better if only for the fact that it increases borrowing power. We've seen clients with no borrowing facilities finding themselves in a position of finally have a business credit line.
EXAMPLE OF ASSET BASED FUNDING
A recent example is the case of a manufacturer who reorganized their business completely due to a lawsuit by a major client. That reorganization found them with zero borrowing power. Enter the ABL. By putting together a facility that includes receivables, inventory and unencumbered equipment a new facility was created for 500k. So 500k from zero - that’s new borrowing power.
WHAT DOES ' ABL ' COST?
Costs of finance ABL vary significantly. While it almost always is more expensive the business owner/manager can generate cash flow, grow their business in an almost unlimited fashion, etc. We do hasten to add though that in some cases on larger transactions Asset based funding is cheaper than traditional chartered bank financing. However, SME owners expect more borrowing power at higher costs. Interest rates are at an all-time low and asset based lenders compete aggressively for your business.
KEY TAKEAWAYS
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A business credit line is a revolving loan allowing businesses to borrow up to a certain limit and repay, only paying interest on the amount used. It's crucial for managing cash flow and covering short-term operational costs.
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Asset-Based Lending Mechanics: This involves understanding how businesses use their assets (inventory, accounts receivable, equipment) as collateral to secure loans. The loan amount typically depends on the value of the secured assets.
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Risk Assessment: Both credit lines and asset-based funding involve a lender’s assessment of risk. For credit lines, it's based on creditworthiness and financial history. In asset-based lending, it hinges on the value and liquidity of the assets pledged.
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Flexibility and Accessibility: These financing options provide flexibility. Credit lines offer readily accessible funds, while asset-based loans give companies a way to raise capital without diluting equity.
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Cost Implications: Understanding the costs, including interest rates and fees associated with these financial tools, is essential. Generally, asset-based loans might have higher costs due to the risk of the underlying assets.
CONCLUSION
There is a solid type of financing for every type of working capital need your firm might have. A small business loan can be a short-term or long-term solution based on your firm's specific needs.
If you want to discover why a business credit line via asset-based funding works better call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your credit facility needs and help you increase borrowing capacity.
FAQ
What are business credit lines?
Business credit lines are revolving loans that allow companies to borrow money up to a set limit and pay interest only on the amount used.
How does asset-based funding work?
Asset-based funding involves securing loans by using a company's substantial assets like inventory or receivables as collateral. There is no maximum loan amount - the assets dictate the loan amount - this type of facility is known as a covenant light structure and places emphasis on highly liquid eligible collateral such as receivables and inventory.
What benefits do these financing options offer?
They provide flexible capital access for managing cash flow and funding growth without diluting ownership.
Are there risks associated with ABL financing solutions?
Yes, improper management of borrowed funds such as an asset based loan or a decline in asset values can pose risks.
Who can benefit from these financial options?
Businesses needing flexible, short-term capital or those with valuable assets but less strong credit histories can benefit.
Can startups access business credit lines?
Startups may access credit lines, but terms depend on their creditworthiness and financial history.
Is personal collateral required for asset-based loans?
Generally, personal collateral isn't required as the business assets serve as the loan security.
How quickly can a business access funds from these sources?
Accessibility varies, but often, funds from credit lines are available quicker than traditional loans.
Do these financial options impact business credit scores?
Yes, like any credit product, they can impact credit scores based on how they're managed.
Are there restrictions on how these funds can be used?
Typically, there are fewer restrictions, but it varies by lender and the specific financial product.
What differentiates a business credit line from a traditional loan?
Unlike traditional loans with a fixed amount and repayment schedule, a business credit line offers flexible borrowing up to a certain limit.
Can asset-based funding affect the operational use of collateralized assets?
Generally, businesses can continue using the assets operationally while they serve as collateral.
What factors determine the credit limit and loan amount in these options?
Credit limits are based on the business's creditworthiness, while loan amounts in
